Potential Economic Effects of the Proposed Free Trade Area of the Americas (FTAA) on the State of Florida Prepared by the CENTER FOR ECONOMIC DEVELOPMENT RESEARCH College of Business Administration 1101 Channelside Drive, Second Floor North, Tampa, Florida 33602 Office: (813) 905-5854 or Fax: (813) 905-5856 May 2005

ii Preface In order to advance effective public policy recommendations regarding the statewide impact of globalizat ion, the University of South Floridas (USF) Globalization Research Center commissioned the Center for Economic Developmen t Research (CEDR) to conduct a study of the poten tial economic effects of pr oposed free trade agreements on the state of Florida. CEDR, a unit of the USF College of Bu siness Administration, initiates and conducts innovative research on economic development. The Centers education programs are designed to cultiv ate excellence in regional deve lopment. Our information system serves to enhance development efforts at USF, its College of Business, and throughout the Tampa Bay area and the state of Florida. May 2005 (Revised) Robert Anderson, Dean, College of Business Administration (COBA), USF Dennis Colie, Director, CEDR, COBA, USF, Co-pri ncipal Investigator Dave Sobush, Associate Director, CEDR, CO BA, USF, Co-princip al Investigator Michael Bernabe, Graduate Research Assistant, CEDR, COBA, USF Jason Rodriguez, Graduate Resear ch Assistant, CEDR, COBA, USF

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iii Executive Summary This report estimates the potential effects of the proposed Free Trade Area of the Americas (FTAA) on the Florida economy. Economic effects are measured by jobs, output, and regional product. These are thr ee descriptions of the same phenomenon, as mass, density, and shape can each be used to describe a solid. The FTAA, if enacted, would become th e largest Free Trade Area (FTA) in the world, encompassing 34 Western Hemisphere nations. Modeled after the North American Free Trade Agreement (NAFTA), the FTAA would reduce over a period of time the prevailing tariffs and other trade re strictions. Currently, the prevailing tariffs imposed on U.S. exports to Latin America can be as high as 25%, ad valorem. Latin American exports to the U.S. typically face fewer and smaller barriers to trade. The FTAAs planned enactment date of January 2005 has passed, and at this time the Dominican Republic Central America Free Trade Agreement (DR-CAFTA) appears to have more political viability than the FTAA. The effects of a full FTAA would encompass the DR-CAFTA effects. Relative to the FTAA nations, the U.S. in year 2000 generated 68.08% of regional production. The U.S. economy is far more dedi cated to services th an its potential FTAA companions. Florida, in turn, produces relatively more services than the U.S. as a whole. Currently, the U.S. carries a trade deficit in ag ricultural and manufactured products with the rest of the FTAA nations, but surpluses in regards to services and investment. Net exports of manufactures to the NAFTA nations (Canada and Mexico) plummeted following enactment of the NAFTA. Because the FTAA seeks to model itself after the NAFTA, logic suggests effects of an FTAA would resemble effects of the NAF TA. Empirical research on the effects of the NAFTA on the U.S. economy suggests that the NAFTA increased total trade with Mexico, net trade (exports minus imports) with Mexico and also increased U.S. Gross Domestic Product (GDP). Other predictive st udies regarding the pot ential effects of the FTAA and DR-CAFTA predic t similar results. Using economic modeling software to eliminate tariffs on agriculture and manufactures, we estimate that enactment of an FTAA would have a slight, but positive, effect on Floridas economy. In the first year of enactment, we estimate Florida employment to increase by 24,973 jobs (0.26%), Florida output (sales) to increase by $4.5B (96$), or 0.52%, and Gross State Produc t (GSP) to increase by $2.2B (96$), or 0.39%. The effects of an FTAA would increas e over time, percola ting through Floridas economy. Finally, we find that full implement ation yields relatively larger economic benefits than partial implementation.

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1 Section 1: Introduction This report estimates the potential economic e ffects of the proposed Free Trade Area of the Americas (FTAA) on the state of Florida. We measure economic effects by jobs, regional product, and output (sales adjusted for i nventory). We hope that this report will aid the development of economically sound policy and investme nt both nationally and regionally. By examining current trade flows from FTAA nations, and the current tariffs levied on such trade, we modify the prevailing prices of imported and exported goods. To produce the estimates, we utilize two computer models, both widely used for these types of economic analyses. To estimate the direct employme nt effect of an FTAA on crop a nd animal production, we utilize the IMPLAN ProfessionalTM model, developed by the Minnesota IMPLAN Group, Inc. To estimate the other economic effects of an FTAA, we add this result to the REMI Policy Insight macroeconomic model, developed by Regional Econom ic Models Inc., of Am herst, Massachusetts, concomitant with changes to export and import cost s. Descriptions of both models appear as appendices to this report. Free Trade Area of the Americas (FTAA) The Free Trade Area of the Americas (FTAA) is a proposed hemispheric-wide free trade zone spanning 34 countries in North, Central, an d South America, along with the Caribbean. Once passed, it would become the largest Fr ee Trade Area (FTA) in the world. Table 1 lists the countries participating in FTAA negotiations. Table 1 FTAA Country Participants Antigua and Barbuda Guyana Argentina Haiti Bahamas Honduras Barbados Jamaica Belize Mexico Bolivia Nicaragua Brazil Panama Canada Paraguay Chile Peru Colombia Saint Kitts and Nevis Costa Rica Saint Lucia Dominica Saint Vincent and the Grenadines Dominican Republic Suriname Ecuador Trinidad and Tobago El Salvador United States of America Grenada Uruguay Guatemala Venezuela

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2 Discussion of the FTAA first began in Decem ber 1994 at the first Summit of the Americas in Miami, Florida. Due to the Mexican Peso cr isis, however, official ne gotiations re garding the FTAA were postponed until the second Summit of th e Americas held in April 1998 at Santiago, Chile. Negotiations for the FTAA have missed thei r scheduled completion target of January 2005. The North American Free Trade Agreement (NAFTA) is the guide for the proposed FTAA. The FTAA would expand the scope of the NAFTA to include all the countries in the Americas (except Cuba) while also incor porating several rules utilized by the World Trade Organization (WTO). The proposed FTAA w ould include new rules for cross border trade-in-services, protection of intellectual property rights, rules to protect the right s of transnational corporations, and a dispute settlement mechanism that allows corporations to sue governments directly for violating these rules. Enforcing the rules established by the FT AA would combine methods used by the WTO and in the NAFTA. Regarding state-to-state disputes the WTO mode l would be used and regarding investor-to-state disp utes the NAFTA model would be used. The state-to-state mechanism of the WTO would allow for the polic ies and programs of another country to be overruled. The investor-to-state mechanism in th e NAFTA grants corporations the rights to sue governments directly for violating any investment s rules of Chapter 11 of the NAFTA. Proposed FTAA investment rules would be similar. Forei gn-based corporations will be allowed to by-pass their own governments and sue other governments regarding issues involving investments and profits. 1 FTAA Development Timeline 1994 December 1st Summit of the Americas (Miami, FL) launches FTAA process 1997 May Trade Ministerial in Belo Horizonte, Brazil 1998 April 2nd Summit of the Americas (Santiago, Chile) Actual Negotiations begin 1999 November Trade Ministerial in Toronto 2001 Early April Trade ministers announce agreements to release text Late April Quebec City Summit: leaders agree to FTAA timeline 2002 April Vice Ministers fail to set guidelines for negotiations May Vice Ministers reconvene produce only initial guidance October Deadline for completing second draft text November 7th Trade Ministerial to be he ld in Ecuador; Brazil and United States to assume co-chairmanship 1 Barlow, Maude and Tony Clarke. (n.d.). Making the Links: A Peoples Guide to the WTO and the FTAA (Council of Canadians and Polaris Institute) Retrieved Jan 2005 from http://www.citizen.org/trade/ftaa/.

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3 FTAA Development Timeline (Contd) 2003 Mid-February Period for presenting offers on goods, services, investment, and government procurement concludes 2004 December Proposed deadline for FTAA enactment 2005 January Deadline missed for concluding negotiations Source: Institute for Policy Studies, web: http://www.ips-dc.org Proposed FTAA Details The main purpose of the FTAA is to promot e economic growth and prosperity of the member countries by eventually eliminating barrie rs to trade in goods, services, and investment within the Western Hemisphere by 2005. The goal of the FTAA process is not to replace existing trade agreements but rather to use these sub-regiona l trade blocs as the basis of negotiations. With this in mind FTAA objectives and principles also mandate special consideration be given to the smaller, less developed countries of the hemisphe re. The FTAA hopes to facilitate the integration of these smaller economies into the agreement. A nother main objective of the FTAA is to secure observance and protection of worker rights. Also it is clear that the FTAA will not become a final agreement until all 34 participating nations have approved each issue.2 U.S. Position on Major Negotiating Issues The FTAAs purpose in regards to market access is to establish rules for progressively eliminating tariffs, non-tariff barrier s, and other measures that rest rict trade. The guiding principle is that of national treatment, which means that governments are required to treat foreign investors, investments, and products at leas t as favorably as their national counterparts.3 The U.S. proposes that the base rate, from wh ich tariffs are phased out, be the lower of a products most favored nation (MFN ) applied rate in effect duri ng the FTAA negotiations or the WTO bound rate at the end of the FTAA negotiati ng process. The U.S. proposes three different categories of tariffs, one class immediately elimina ting tariffs on some classe s of products, and the other two classes phasing out tari ffs over a 5 or a 10-year period. Th e U.S. proposes that the actual classification of the products be based on the 1996 Harmonized System (and the changes planned for 2002). The U.S. also proposes that imported goods must be treated no less favorably than like domestic goods in respects of the law and the el imination of consular tr ansactions and import and 2 McCoy, Terry L. (2001). The Free Trade Area of The Americas: Opportunities & Challenges for Florida Retrieved Jan 2005 from http://www.latam.ufl.edu/publications/publisting.html#labep. 3 Anderson, Sarah and John Cavanagh. (2002). State of the Debate on the Free Trade of the Americas Retrieved Jan 2005 from http://www.pcusa.org/trade/ftaa.htm.

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4 export restrictions and increased transparency regarding import licensing procedures and fees imposed in connection with importation and exportation.4 To guard against or remedy import injury suffered by a domestic industry, the U.S. proposes that the safeguard measures be in the form of tariff increases, and opposes tariff rate quotas and quantitative restrict ions. Before a safeguard measure would be implemented, the FTAA country would have the burden of proving a particular import is a substantial ca use of serious injury to a domestic industry. The U.S. also proposes provisional methods in cases where the damage caused would be difficult to repair. These provisional safeguards would not exceed 200 days and there would be adequate measures for restoring an individual ve ndor to the equitable position he would have found himself in had the provisional measures not been erroneously applied against him. The U.S. further proposes that hemispheric safeguards would only be available for a period of ten y ears and that they may be impos ed only once against the same good and for a maximum of three years. These hemi spheric safeguards could take the form of suspension of duty reduction or increases (with lim its) of the duty on a particular good. One of the U.S.s goals is to eliminate and prevent unnecessa ry technical barriers to trade in the Western Hemisphere.5 The FTAAs purpose in regards to investment is to create a stable and predictable environment that protects international investors.6 The U.S. proposes that the scope of the investment be dictated by the definitions and cont ent of the particular commitment giving rise to the investment, but proposes denying benefits of the agreement to investments that are "shell" companies. The U.S. also proposes that investor s in like circumstances be given the better of national treatment or most favored nation (M FN) treatment. The U.S. supports classic expropriation disciplines (i.e., th at expropriations must be for a public purpose, nondiscriminatory, in accordance with due process of law, and accompanied by payment of prompt, adequate, and effective compensation). Regarding managerial pe rsonnel, the U.S. makes two specific proposals: (1) foreign Party's right to enter the territory of another FTAA country for the purpose of establishing, maintaining, advisi ng or providing other essential serv ices to an investment; and, (2) investors given "the right to hire their top managerial personnel w ithout regard to nationality. The U.S. further "proposes that invest ors have the right to transfer f unds into and out of the FTAA host country without delay using a market rate of exchange. The U.S. also proposes prohibiting mandatory requirements, such as incorporating sp ecified levels of local contents, export at specified levels, etc. Regarding the environment and labor laws, the U.S. has proposed that FTAA countries should be obliged to strive to ensure that neither environmen tal nor labor laws are relaxed in order to attract investments. The U.S. encourages transparency.7 The FTAAs purpose in regard to services is to progressively liberalize trade in services (everything from financial services, teleco mmunications, and tourism to health care and education). This means opening up local service ma rkets to foreign busine sses and restricting or prohibiting governmental policies th at interfere with the market.8 The U.S.'s position on services is that the FTAA Agreement service chapter should be comprehensive, cover all service sectors 4 McCoy (2001) 5 Ibid 6 Anderson and Cavanagh (2002) 7 McCoy (2001) 8 Anderson and Cavanagh (2002)

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5 and service suppliers and include all leve ls of governments and non-governmental bodies performing government dele gated responsibilities.9 The FTAAs purpose in regard to agriculture is to progressively eliminate agricultural tariffs, non-tariff barriers, and expor t subsidies and to ensure that food safety standards are not disguised restrictions on trade.10 The U.S. calls for a coordinated approach between the Market Access and Agriculture Negotiating Groups to develop fundamental ta riff models. U.S. calls for: (1) agreement to eliminate agricultural expor t subsidies within the hemisphere and (2) establishment of mechanisms to prevent agricultu ral products from being exported to the FTAA by non-FTAA countries.11 Economic Implications of Tariffs A tariff is a tax placed on imported and/or exported goods, sometimes called a customs duty. Two main types of tariffs exist, a revenue ta riff and a protective tariff. While a revenue tariff is set mainly to raise money for the government and a protective tariff is intended to artificially inflate prices of imports thus protecting dome stic industries from fore ign competition, the true distinction between the two is unclear. Revenue ta riffs also offer protectio n and protective tariffs can also produce some revenue for the regulating country unless they are prohibitive in which case little or nothing is imported of that product, thus resulting in trivial or no revenue. A tariff is usually implemented as a specific tari ff or an ad valorem tariff. A specific tariff is one of a specific amount of money that does no t vary with the price of the good. Difficulty lies in deciding the amount at which to set them, and they may need to be updated due to changes in the market or inflation. An ad valorem tariff is a fixed percentage of the value of the good that is being imported. These can be problematic to apply, such as when the international price of a good falls, so does the tariff, and domestic indus tries become more vulnerable to competition. Conversely when the price of a good rises on the international mark et so does the tariff, but a country is often less interested in pr otection when the price is higher. Protective tariffs are a measure used to protect a country's ma jor industries against foreign competition, which can result in the loss of jobs a nd tax revenue that can severely impair parts of that country's economy. However, protective tariffs have disadvantages as well. The most notable is that they increase the price of the good subject to the tariff, disadvantaging consumers of that good or manufacturers who use that good to produ ce something else: for example a tariff on food can increase hunger, while a tariff on steel can make automobile manufacture less competitive.12 Table 2 reports Latin American tariffs on U.S. goods and the regional value of revenue gained through exporting certain items in the y ear 2000. The approximate total value of selected merchandise is $676B. The table also shows the revenue share of each item gained by exporting to Latin America and the tariffs app lied on those items. Tariffs app lied to these items average 13.76% (ad valorem). Finally, the table reports estimat ed tariff expenses incurred by the U.S. from 9 McCoy (2001) 10 Anderson and Cavanagh (2002) 11 McCoy (2001) 12 Tariff (n.d.) Retrieved April 2005, from http://en.wikipedia.org/wiki/Tariffs

7 goods that the country does not have a competitive advantage in and yet produces them. Because the country does not have a competitive advantag e in the goods, the cost of producing the goods will be higher than the cost of other countries, and therefore, the selling price will be higher than the world price of the goods. In the end, consum ers are the ones who suffer the consequences by paying higher prices for the goods that have restrictions placed on it. Several Latin American countries impose notab le quotas on U.S. goods. Highlights include quotas on pulp, paper, and automobiles impos ed by Argentina, quotas on industrial goods (including automobiles) and on informatics pr oducts imposed by Brazil, and quotas on poultry products, meat, and fruits imposed by Chile. Although not a true quota higher duties based on quantity are imposed on alcoholic beverages, textiles, some luxur y items, and automobiles by El Salvador. Also while quotas were recently elimin ated in Costa Rica, the institution of new tariffs essentially replaced them. While the U.S. may not be affected by any quotas imposed by Mexico, they continue to face extensive custom procedur es on products including textiles, footwear, beer, and consumer electronics.13 The U.S. also faces tariff rate quotas imposed by Canada on dairy, eggs, and poultry products.14 A tariff rate quota (TRQ) combines the restrictive po licies of quotas and tariffs. In a TRQ, the quota component works t ogether with a specified tariff level to provide the desired degree of import protection.15 Estimated Economic Effects of FTAA Estimated economic effects to result from the implementation of the FTAA include:16 The FTAA will increase annual U.S. globa l agricultural exports and imports by about $1B each. Elimination of tariffs on intra-regional trade in agriculture and manufacturing will increase annual U.S. agri cultural exports to other countries in the Western Hemisphere by $1.4B (6 percent) a nd annual imports from the 33 countries by about $900M (3 percent). Agricultural trade in the Western Hemisphere will increase by $4B (6 percent). Trade liberalization of both agricultural and manufacturing goods in the FTAA will increase the welfare (consumer purchasing power) of the Western Hemisphere by $63B annually. The FTAA will have small effects on U.S. agricultural production because trade with the Western Hemisphere accounts for only a small sh are of aggregate output, and U.S. tariffs are already low. Estimated economic impacts of the FTAA for Florida include:17 13 Latin American Trade and Transportation Study (Phase 1) (2001). Retrieved April 2005, from http://www.wilbursmith.com/latts/index.html 14 Canada: Trade. (2004). Retrieved April 2005, from Economic Research Service, United States Department of Agriculture Web site: http://www.ers.u sda.gov/briefing/canada/trade.htm 15 Tariff rate quota (n.d.) Retrieved May 2005, from http://www .webref.org/agriculture/t/tariff_rate_quota.htm 16 Burfisher, Mary E .US Agriculture and the Free Trade Area of the Americas. (2004). Retrieved March 2005 from http://www.ers.usda.gov/Publications/aer827/ 17 The Economic Impacts of Locating the FTAA Secretariat in Florida (2003). Retrieved January 2005 from http://www.eflorida.com/

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8 The generation of approximately 45,254 jobs as a result of trade liberalization achieved with the FTAA. An average annual estimate of $1.6B in payroll earnings. An estimated addition $7.6B to Floridas Gross State Product can be expected. An estimated $73M annually in fiscal revenue s for Floridas state and local governments. U.S.-Dominican Republic-Central Amer ica Free Trade Agreement (DR-CAFTA) As mentioned above, the nego tiations for the FTAA have not progressed as rapidly as originally hoped. Thus, separate negotiations bilatera l and multilateral have gone forward in the hopes of creating a hemispheric FTA in lieu of a full FTAA. One such agreement is the U.S.Dominican Republic-Central America Free Trade Agreement (DR-CAFTA). The Congress of El Salvador has already ratified th e DR-CAFTA, which is expected to go before the U.S. Congress in mid-2005. While it appears that the DR-CAFTA ma y become reality well in advance of a full FTAA, we present in this report only the estimated effects of a full FTAA. Summary Thirty-four countries in North, Central, and South America, and the Caribbean are included in the proposed free trade zone known as the Free Trade Area of the Americas (FTAA). The main focus of FTAA negotiations is to eliminate trad e barriers to goods, serv ices, and investments between the countries involved, thus promoti ng economic growth. The proposed deadline for completion of negotiations and implementation of FTAA was January 2005. That deadline has passed, negotiations have not been comp leted, and no FTAA has been implemented. The U.S.s most significant contribution to the ongoing negotiations was the proposal to eliminate tariffs and other restrictive trade ba rriers. Upon implementation of the FTAA U.S. agricultural exports to other countries in the Western Hemisphere would experience an annual estimated increase of $1.4 billion, imports from those countries would increase by about $900M, and welfare of the Western Hemisphere would increase by about $63B annua lly. Existing tariffs imposed by Latin America on U.S. products that sta nd to be eliminated range from 1.99% to 25% ad valorem. Based on U.S. exports in 2000, that is an elimination of about $6.5B incurred as tariff expense to Latin America. Narrower ranges apply to certain categories of products such as: 1.99% to 18.7% for production goods, 7.54% to 25% for tex tile, apparel, and leather manufacturing, and 9.06% to 12% for non-textile a nd non-metal manufacturing. While negotiations for a full FTAA have yet to be completed other negotiations for smaller bilateral and multilateral agreements have been moving forward and are closer to completion. Most notable is the U.S. Dominican Republic -Central America Free Trade Agreement (DRCAFTA) scheduled to go before the U.S. Congress around mid-2005.

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9 Section 2: Baseline Production and Tr ade Levels Across Western Hemisphere The purpose of this section is to report national production and recent trade flows between the United States and selected Western Hemisphe re nations. We examine gross domestic product (GDP), exports, imports, and net exports (trade balance) in three sectors: agriculture, manufactures, and services. These are the sect ors for which we will later report the potential effects of an FTAA. We also examine invest ment positions between the U.S. and the other participant FTAA nations. In this section, summa ry charts are utilized for our presentation; Appendix A contains detailed data tables fr om which the charts were developed. Wherever possible, we report data by na tion group. The three nation groups are (1) NAFTA, composed of the United States, Cana da, and Mexico, (2) the Group of Six, which represents the nations of Argentina, Brazil, Ch ile, Colombia, Peru, and Venezuela, and (3) the Micro-Economies, defined as th e balance of the FTAA nations. National Production of FTAA Participants National production and producti on by sector varies greatly across the nations of the Western Hemisphere. Regional production among the FTAA nations increased by 75% in real terms between 1981 and 2000. In 1981, U.S. GDP accounted for 65.17% of FTAA production and this share increased to 68.08% in 2000. Chart 1 depicts the composition, by share, of FTAA production by nation group. Chart 1 Composition of FTAA Production b y Nation Group, 1981-20000% 20% 40% 60% 80% 100% 19811982198319841985198619871988198919901991199219931994199519961997199819992000 Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.1, Center for International Comparisons at the University of Pennsylvania (CICUP), October 2002. NAFTA Group of 6 Micro Economies As shown in Chart 1, production share by na tion group remained relatively stable from 1981-2000. Chart 2 depicts annual production for each of the three FTAA nation groups.

11 In 1999, 2.48% of FTAA regional production wa s tied to agriculture. Among the FTAA nation groups, the Micro-Economies had the larges t agriculture sector, m easured at 12.18% of their economy, the Group of Six nations 7.08%, and the NAFTA nations 1.82%. By 2003, agriculture accounted for 2.31% of FTAA regi onal production, with the NAFTA nations share falling slightly to 1.80%, the Group of Six rising to 7.41%, and the Micro-Economies saw agricultures contribution to their economy fall to 11.27%. Chart 4 reports, for years 1999-2003, the percen tage of each nation groups economy attributable to industry. The FTAA total is the weighted average (by GDP) of each nations industry percentage. Here, industry corres ponds to ISIC divisions 10-45 and includes manufacturing (ISIC divisions 15-37). It comp rises value added in mining, manufacturing (also reported as a separate subgroup), constr uction, electricity, water, and gas. Chart 4 Industrial Production as a Percentage of NationGroup Economy, 1999-200320 25 30 35 19992000200120022003Source: World Bank Data Query, http://devdata.worldbank.org/data-query NAFTA Group of Six Micro-Economies FTAA In 1999, 25.73% of FTAA regional production wa s attributed to industrial production. Among the FTAA nation groups, the Group of Six had the largest industrial sector, measured at 28.96% of their economy, the Micro-Economies 27.19%, and the NAFTA nations 25.36%. By 2003, industry accounted for 24.13% of FTAA regi onal production, with the NAFTA nations share falling to 23.87%, the Group of Six fa lling to 27.16%, and the Micro-Economies saw industrys contribution to their economy fall to 26.57%. Chart 5 reports, for years 1999-2003, the percen tage of each nation groups economy attributable to service production. The FTAA to tal is the weighted average (by GDP) of each nations production of services percentage. Serv ices correspond to ISIC divisions 50-99 and they include value added in wholesale and retail trade (i ncluding hotels and restau rants), transport, and government, financial, professional, and personal serv ices such as education, health care, and real estate services.

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12 Chart 5 Production of Services as a Percenta g e of Nation Group Economy, 1999-200360 65 70 75 80 19992000200120022003 Source: World Bank Data Query, http://devdata.worldbank.org/data-query NAFTA Group of Six Micro-Economies FTAA Services compose the majority of FTAA regional production. In 1999, 71.79% of FTAA regional production was tied to services. Among the FTAA nation groups, the NAFTA nations had the largest service sector measured at 72.82% of their economy, the Group of Six nations 63.96%, and the Micro-Economy nations 60.62%. By 2003, services accounted for 73.56% of FTAA regional production, with the NAFTA nations share rising to 74.34%, the Group of Six rising to 65.42%, and the Micro-Economies saw serv ices contributi on to their economy rise to 62.16%. Florida Production, 1981-2000 In 1981, Floridas Gross State Product (G SP) stood at $492B (measured in chained 1996 dollars), accounting for almost one-tenth of US GDP. By 2000, Floridas GSP increased to just over $1.1T and at that poin t, accounted for 12.2% of U.S. GDP. Chart F1 below, displays the share of regional production for Fl orida, the U.S., and the FTAA aggregate for years 1981-2000. Chart F1 Composition of FTAA Regional Product, 1981-20000% 20% 40% 60% 80% 100%19811982198319841985198619871988198919901991199219931994199519961997199819992000Sources: REMI TM (Florida Data), Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.1, Center for International Comparisons at the University of Pennsylvania (CICUP), October 2002. (US and FTAA Data) Florida Total US Total FTAA

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13 U.S. Agriculture Trade, 1989-2004 The following three charts display, for year s 1989 through 2004, U.S. agricultural exports, U.S. agricultural imports, and U.S. agricultural net exports (i.e. balance of trade) with the other FTAA nations. Export and import values reported in nominal dollars are based on either a Free Alongside Ship (FAS) or Customs basis.18 In 1989, U.S. agricultural exports to the FTAA region exceeded $7.6B. By nation-group, this amount was parsed as follows: Micro-Economies 19.3%, the Group of Six 12.4%, and the NAFTA groups at 68.3%. By 2004, agricultural exports from the U.S. to the FTAA region increased by 247% to $26.5B, with the shares go ing to the Micro-Economies and the Group of Six falling (10.9% and 6.5%, respectively) at the expense of an increased share to the NAFTA group 82.6%. This is a logical conclusion, given NAF TAs implementation during this time period. Chart 6 depicts the composition, by share, of U.S. agriculture exports to the FTAA nation groups. 18 Free Alongside Ship (FAS) costs include transportation and packaging costs incurred by the buyer up until the point the good is alongside, but not on the ship, where ship can be any type of vehicle or vessel. Customs valuation for imports excludes costs of international transportation and insura nce, as well as tariffs, and is similar to FAS valuation. Florida accounted for 8.27% of FTAA pr oduction in 2000. Put another way, if Florida was a nation, it would rank as the th ird-largest FTAA participant, behind the United States (less Florida) and Brazil based on year 2000 production. Floridas economy is significantly more dependent on services than the U.S., and thus more dependent on services than the FTAA aggregate. Table F1 reports, for year 2000 (the most recent year for which a direct comparison can be made), the composition of the economies of Fl orida and the three nation-groups. Table F1 Comparison of Economic Composition (by % ValueAdded) AgricultureIndustrial Services Florida 1.29%15.45%83.26% NAFTA 1.80%25.11%73.09% Group of Six 7.02%29.75%63.23% Micro-Economies 11.63%27.95%60.42% Sources: REMI, Heston, et al To balance the relatively higher reliance on services, Florida significantly differs from the rest of the NAFTA group in terms of industrial value-added as a percentage of the economy.

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14 Chart 6 Composition of U.S. A g riculture Exports to FTAA Nation Groups, 1989-20040% 20% 40% 60% 80% 100%1989199019911992199319941995199619971998199920002001200220032004 Source: U.S. International Trade Commission, Interactive Tariff and Trade DataWeb Version 2.7.1 NAFTA Group of Six Micro-Economies In 1989, U.S. agricultural imports from th e FTAA region exceeded $10.5B. By nationgroup, this amount was parsed as follows: Mi cro-Economies 19.8%, the Group of Six 31.0%, and the NAFTA groups at 49.2%. By 2004, agricultural imports from the FTAA region to the U.S. increased to $27.5B, with the shares going to th e Micro-Economies and the Group of Six falling (13.2% and 18.9%, respectively) at the expense of an increased share to the NAFTA group 67.9%, again showing evidence of NAFTAs positive e ffect on increasing agricultural trade flows. Chart 7 depicts the composition, by share, of U.S. agriculture imports from the FTAA nation groups. Chart 7 Composition of U.S. A g riculture Imports From FTAA Nation Groups, 1989-20040% 20% 40% 60% 80% 100%1989199019911992199319941995199619971998199920002001200220032004 Source: U.S. International Trade Commission, Interactive Tariff and Trade DataWeb Version 2.7.1 NAFTA Group of Six Micro Economies Net exports of agricultural goods from th e U.S. to the FTAA nations were negative throughout the period 1989 to 2004, except in 2001 a nd 2003. However, the value of these net exports rose from 1989 to 2004 by over $1.8B. This in crease was primarily due to U.S. trade with the NAFTA nations; net agricu ltural exports rose by $3.1B dur ing this period. Whereas,

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15 agricultural net exports from th e U.S. to the Micro-Economies fell by $141M (23%), while similar trade with the Group of Six nations fell by $1.1B (51%). Chart 8 below, displays net agricultural exports from the U.S. to the three nation-groups for years 1989-2004. Chart 8 U.S. Net A g riculture Ex p orts to FTAA Nation Grou p s, 1989-2004$(4,000) $(3,000) $(2,000) $(1,000) $$1,000 $2,000 $3,000 $4,000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: U.S. International Trade Commission, Interactive Tariff and Trade DataWeb Version 2.7.1Millions of Nominal $ NAFTA Group of Six Micro Economies Agriculture is of special importance to Fl oridas economy, both in terms of quantitative effects (jobs, output, and pr oduct) and qualitative effects, such as historical signif icance, political influence, and state image. In Appendix B we present an analysis of the Floridas citrus and sugarcane industries with resp ect to the other FTAA nations. U.S. Manufacturing Trade, 1989-2004 The following three charts display by nation group, for years 1989 through 2004, U.S. manufacturing exports, U.S. manu facturing imports, and U.S. ma nufacturing net exports (i.e. balance of trade) with the other FTAA nations. In this section, manuf acturing is defined as Standard International Trade Classi fication (SITC) Sections 5 through 9.19 We express all values in nominal dollars. In 1989, U.S. manufacturing exports to th e FTAA region exceeded $110.5B. By nationgroup, this amount was parsed as follows: Micr o-Economies 6.6%, the Group of Six 9.8%, and the NAFTA group at 83.6%. By 2004, manufacturing exports from the U.S. to the FTAA region increased to $314.3B, with the shares going to th e Micro-Economies decreasing slightly, to 6.5%, and the Group of Six falling to 9.1% at the expe nse of an increased share to the NAFTA group 84.3%, suggesting again the influence of NAFTA on U.S. trade flows. 19 The SITC, now in its third revision, predates the Harmonized System and is an appropriate classification system for data when international comparability is required, especially for long time series.

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16 Chart 9 depicts the composition of U.S. manuf actures exports by nation group for years 1989-2004. Chart 9 Composition of U.S. Manufactures Exports to FTAA Nation Groups, 1989-20040% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%1989199019911992199319941995199619971998199920002001200220032004Source: Presented by the Office of Trade and Industry Information (OTII), Manufacturing and Services, International Trade Administration, U.S. Department of Commerce NAFTA Group of 6 Micro-Economies As depicted in Chart 9, the composition of U.S. manufactures e xports to FTAA nation groups did not experience tremendous change s from 1989 to 2004. However, in the immediate post-NAFTA years (1995-1998), manuf actures exports to the NAFTA nations as a percentage of manufactures exports to th e FTAA region dipped slightly. In 1989, manufacturing imports from the FT AA region exceeded $100.2B. By nationgroup, this amount was parsed as follows: Micr o-Economies 3.9%, the Group of Six 8.5%, and the NAFTA groups at 87.6%. By 2004, manufacturing im ports to the U.S. from the FTAA region increased to $352.3B, with the shares going to th e Micro-Economies increasing to 5.0%, and the Group of Six falling to 7.6% at the expense of an increased share to the NAFTA group 84.3%, suggesting again the influence of NAFTA on U.S. tr ade flows. The relatively stable structure of manufacturing import shares by nation-group may be attr ibutable to the general lack of U.S. tariffs on goods manufactured within the hemisphere.20 Chart 10 displays the composition of U.S. ma nufactures imports by FTAA nation group for years 1989-2004. 20 Smith, Mark. The Economic Impact of the U.S. -Dominican Republic-Central Am erica Free Trade Agreement (DRCAFTA) on Florida. U.S. Chamber of Commerce, 2004.

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17 Chart 10 Composition of U.S. Manufactures Imports From FTAA Nation Groups, 1989-2004 0% 20% 40% 60% 80% 100%1989199019911992199319941995199619971998199920002001200220032004 Source: Presented by the Office of Trade and Industry Information (OTII), Manufacturing and Services, International Trade Administration, U.S. Department of Commerce NAFTA Group of 6 Micro-Economies As depicted in Chart 10, the composition of U. S. manufactures imports from FTAA nation groups did not experience tremendous change s from 1989 to 2004. However, in the immediate post-NAFTA years, manufactures exports to the NAF TA nations as a percen tage of manufactures exports to the FTAA region dipped slightly. Net exports of manufacturi ng goods from the U.S. to the FTAA nations fell between 1989 and 2004 by over $48.2B. This decrease was primarily due to U.S. trade with the NAFTA nations, where net manufacturing exports fell by $47.4B ( 1044%) during this perio d. Manufacturing net exports from the U.S. to the Micro-Economie s fell by $571M (17%), while net manufacturing exports to the Group of Six nations fell by $250M (11%). Chart 11 below, displays net manufacturing exports from the U.S. to the three nation-groups for years 1989-2004. Chart 11 U.S. Net Manufacturin g Exports to FTAA Nation Groups, 1989-2004 $(50,000) $(40,000) $(30,000) $(20,000) $(10,000) $$10,000 $20,000 $30,000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Source: Office of Trade and Industry Information (OTII), Manufacturing and Services, International Trade Administration, U.S. Department of Commerce(Millions of Nominal Dollars) NAFTA Group of 6 Micro-Economies

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18 U.S. Services Trade, 1986-2003 Trade in services is monitored by the U.S. Bu reau of Economic Analysis (BEA) as part of the construction of the national in come and product accounts. Unlike the data for agricultural and manufacturing trade, the BEA does not report trade of services to the same level of geographic detail, for purposes of maintaining confidentiali ty. The following three tables report exports, imports, and net exports of private services expr essed in nominal dollars between the U.S. and the other nations of the Western Hemisphere.21 We are not able to analyze the services data by three nation-groups as we did for agriculture a nd manufacturing, instead we analyze the data by the NAFTA group and a non-NAFTA group. Chart 12 reports U.S. exports of private services to the FTAA region. In 1986, U.S. exports of private services to the FTAA region exceeded $22.6B. Mexico and Canada accounted for 57.3% of this total. By 2003, exports of private se rvices to the FTAA region from the U.S. increased to $80.3B, with the share going to the non-NAFTA nations rising to 46.1%. Chart 12 U.S. Exports of Private Services to the Western Hemisphere, 1986-2003$$10,000 $20,000 $30,000 $40,000 $50,00019 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03Source: U.S. BEA, Balance of Payments Division,Table 2 (Millions of Nominal Dollars) NAFTA Non-NAFTA Chart 13 reports U.S. imports of private services from the FTAA region. In 1986, U.S. imports of private services from the FT AA region exceeded $19.3B. Mexico and Canada accounted for 51.7% of this total. By 2003, imports of private services from the FTAA region to the U.S. increased to $68.1B, with the share going to the non-NAFTA nations rising to 54.7%. 21 Western Hemisphere includes nations not participating in FTAA negotiations. However, these non-participants economies are relatively small, and thus do not greatly influence trade patterns within the Hemisphere.

20 Intra-Regional Investment, 1982-2002 The following three charts display by na tion group, for years 1982 through 2002, U.S. Direct Investment Abroad (USDIA), Foreign Direct Investment in the U.S. (FDIUS), and the net of USDIA and FDIUS (i.e. balan ce of investment) with the othe r FTAA nations. Data represent investment positions on a nominal cost basis. In 1982, USDIA in the FTAA region exceeded $77.9B. By nation-group, this amount was parsed as follows: Micro-Economies 13.6%, th e Group of Six 24.2%, and the NAFTA groups at 62.3%. By 2002, USDIA in the FTAA region increased to $318B, with the shares going to the Micro-Economies decreasing to 8.7%, and the Group of Six falling to 20.3% at the expense of an increased share to the NAFTA group 71.0%. Shar es of USDIA to FTAA nation groups appear to be more volatile than goods and se rvices trade, as depicted in Chart 15 Chart 15 Composition of USDIA to FTAA Nation Groups, 1982-20020% 20% 40% 60% 80% 100%198219831984198519861987198819891990199119921993199419951996199719981999200020012002Source: U.S. BEA NAFTA Group of Six Micro-Economies In 1982, FDIUS from the FTAA region exceeded $14.6B. By nation-group, this amount was parsed as follows: Micro-Economies 16.2% the Group of Six 2.3%, and the NAFTA groups at 81.5%. By 2002, FDIUS from the FTAA region in creased to $116.2B, with the shares going to the Micro-Economies decreasing to 8.5% at the e xpense of increased shares to the Group of Six (5.5%), and the NAFTA group (85.9 %). As the case with USDIA, shares of FDIUS from FTAA nation groups appear to be more volatile than goods and services trade, as depicted in Chart 16

22 Summary: Baseline Production and Trade in the FTAA Region Production within the FTAA region has steadily risen over the last 20 years, although at a faster pace in the NAFTA nations than in th e other two nation groups. In the FTAA region, smaller economies tend to devote a larger percentage of their economic activit y to agriculture than larger ones. Larger economies produce a greater relative share of services than do smaller ones. Floridas economy, as measured by GSP, grew at a faster pace .55% than the United States as a whole 84.01% from 1981 to 2000, and devotes a greater percentage of its production to the services sector relative to the NAFTA group. Not surprisingly, hemispheric tr ade flows between the U.S. a nd its partner nations appear to be tied to production. As a ma rket, large GDP nations have a larger appetite for U.S. goods and services. Similarly, large GDP nations pr oduce more goods and services for American consumption. Among the potential members of an FTAA, the U.S. conducts the preponderance of its trade with Canada and Mexico, its NAFTA pa rtners. While the NAFTA appears to have had little effect on the U.S. trade balance in agriculture and priv ate services, net exports of manufactures to the NAFTA nations plummeted shortly after its adoption. Examining crossborder investment, we find that th e U.S. invested more resources in FTAA nations than vice-versa for the period 1982-2002. This balance, measured as USDIA minus FDIUS, tripled in nominal terms in the 20-year period 1982-2002. Overall, the U.S. carried a positive trade ba lance with the non-NAFTA western hemisphere nations in 2002 of approximately $79B, although net exports of agriculture products were negative. This is despite the fact that U.S. goods face tariffs in the non-NAFTA portion of the hemisphere whereas hemispheric goods typically enter the U.S. duty free.

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23 Section 3: Potential Impacts: Literature Review Introduction Proponents of free trade agreements argue that a reduction of trade barriers enables a country to utilize their comparativ e advantage to increase their standard of living. However, opponents of free trade agreements make the argume nt that a reduction of trade barriers allows developed countries to exploit developing countries, and causes developed count ries to lose jobs to the developing countries. In the U.S., negotiations over the FTAA have sparked similar debate as to whether the proposed agreement among the 34 count ries will have a positive or negative effect on U.S. trade, employment, and GDP. A glimpse of the potential effects of the FTAA on Florida may be obtained by examining empirical literature on current U.S. free trade ag reements. Particularly, this section summarizes empirical literature that quantifies or predicts the effects of the NAFTA, the DR-CAFTA, and the recently implemented U.S.-Chile Free Trade Ag reement (US-CFTA). The review of NAFTA, DR-CAFTA, and US-CFTA is important to the FT AA because the countries involved within these agreements are included in th e current FTAA negotiations. A key challenge for the researchers is separati ng the effects of trade agreements from other factors that have influenced tr ade including the economic and political climate among the trading partners, technological innovation, a nd an the amount of economic integration among the countries prior to the trade agreement. Ho wever, the empirical literature doe s offer insight into the types of effects, and the magnitude of the effects th e FTAA could potentially have on U.S. imports, exports, employment, and GDP. The first study in the following section estim ates the effects of DR -CAFTA, and the second study examines the early impacts of US-CFTA. The remaining seven studies discuss the NAFTA experience, post-implementation. The trade effects of NAFTA on U. S. and Canadian trade were excluded in six of the seven studi es. These two countries entere d into the United States-Canada Free Trade Agreement in 1988, leavi ng very little restricted trade between the two countries upon the enactment of NAFTA in 1994. Additionally, several of the NAFTA studies estimate the percentage increase in U.S. and Mexico tr ade and U.S. GDP due solely to NAFTA. The Economic Impact of the U.S.-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) on Florida 22 According to Smith (2004), Florida-origin goods in 2003 accounted for over a fifth of all U.S. goods exported to the DR-CAFTA countries with a value of $3.1B, and exports to DRCAFTA countries helped to su stain approximately 65,000 Florida jobs. The implementation of DR-CAFTA would reduce trade ba rriers and tariffs between the United States, Costa Rica, the Dominican Republic, Guatemala, Honduras Nicaragua, and El Salvador. 22 Smith, Mark. 2004. The Economic Impact of the U.S.-Dominican Re public-Central America Free Trade Agreement (DR-CAFTA) on Florida, U.S Chamber of Commerce Western Hemisphere Affairs.

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24 Smith analyzed the potential impacts of DR-CAF TA on the state of Florida in an effort to estimate the increase in jobs, earnings, and out put that would occur upon the implementation of DR-CAFTA. Impacts were estimated using the U.S. Department of Commerces Bureau of Economic Analysis Regional Input-Output Mo deling System (RIMS II). Using 2003 baseline export data to DR-CAFTA countries, Smith estimat ed the effects of an increase in output across industries on income and employment. Experi ences from the NAFTA and the US-CFTA were used to make two key assumptions regarding expor t growth. First, Florida exports to the DRCAFTA region are expected to in crease by 17% in the first year. Second, Florida exports to DRCAFTA countries are expected to increase by 91% after nine years. Smith predicts that Floridas output will increase by $958M one year after implementation of DR-CAFTA, and by $5.1B across all industries nine years after implementation. Next, Smith estimates that earnings of employees in Florid a will increase $226M one y ear after implementation of DR-CAFTA, and by $1.2B nine years after imp lementation. Lastly, jobs in Florida are estimated to increase by 6,879 one year after im plementation, and by 36,308 jobs nine years after implementation of DR-CAFTA. Early Effects of the U.S. Chile Free Trade Agreement 23 The U.S. Chile Free Trade Agreement (US CFTA) became effective on January 1, 2004. USCFTA eliminated 90% of the tariffs on U.S. exports to Chile, and on 95% of the tariffs of Chilean exports to the U.S. Chart 18 below displays the quarter ove r quarter increase in exports between the United States and Chile from 2003 to 2004. During the first three months following the implementation of USCFTA U.S. exports to Chile increased 24% to $766.79M. Chilean exports to the United Stat es increased 12.1% during th e same time period to $1.17B. Chart 18 Percentage Increase in Exports Q1-2003 compared to Q1-2004* 0% 5% 10% 15% 20% 25% 30%Percent Increase in Exports U.S. Exports to ChileChilean Exports to the U.S. *US-CFTA entered into force on January 1, 2004. Source: U nited States Trade Representative, 2004. The U.S. Chile Free Trade A greement: An Early Record of Success. 23 United States Trade Reprehensive, 2004. The U.S. Chile Free Trade Agreement: An Early Record of Success.

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25 The Impact of NAFTA on the United States 24 Burfisher, Robinson, and Thierfelder (2001) compare arguments made pre-NAFTA to the post-experience data. They conclude (1) economist s make reasonable forecasts of gains from free trade agreements, (2) regional tr ade liberalization primarily aff ects resource allocation, production and trade patterns as opposed to aggregate trade ba lances, (3) free trade agreements are an impetus for economic structural change, particularly in the labor mark et, and (4) free trade tends to motivate domestic reforms of policies that distort prices. NAFTA and Agriculture, An Early Assessment 25 In this study, one of many reviewed by Burfisher, et al (2001), DeJanvry (1996) uses a regression model to control for the effects of the NAFTA on trade patterns and macroeconomic shocks such as the 1995 peso crisis. The model predicts that without NAFTA U.S. exports to Mexico would have decreased by 28% in 1995 rather than 14%. Additionally, the model predicts that exports to Mexico would ha ve increased by 3% rather than the 19% observed in 1994 without NAFTA, and in 1995 imports would have fallen by 3% ra ther than increase by the 17% observed. Trade Creation and Trad e Diversion Under NAFTA 26 This analysis uses a pooled-time-series-cross-s ection regression to test for the effect of regional trade agreements. Krueger (1999) incl udes 61 countries for six years and many other variables trade values, GDP, popul ation, exchange rates, language, and distance to control for trade effects. The model finds no statistical relationship between incr eased trade and NAFTA countries. However, the study did find that NAF TA countries imported significantly fewer goods from non-NAFTA trading partners since the in ception of NAFTA, suggesting that trade agreements re-distribute, rather than create trade. The U.S. Employment Impacts of North Am erican Integration After NAFTA: A Partial Equilibrium Approach 27 Two of the major findings in this report by Hino josa-Ojeda et al. (2000) support claims that NAFTAs lowering of tariffs had only a slight im pact on trade between the U.S. and Mexico and that trade due to NAFTA had similarly in significant impacts on U.S. employment. While U.S. imports from Mexico experienced an annual growth rate of 20% in the years after NAFTA, compared to the average growth ra te of 6.3% in the thr ee years prior to NAFTA, analysis of U.S.-Mexico trade patt erns indicate that growth in U. S. imports of NAFTA-liberalized 24 Burfisher, M., S. Robinson, and K. Thierfelder. 2001. The Impact of NAFTA on the United States, Journal of Economic Perspectives 15:1 pp. 125-144 25 DeJanvry, A. 1996. NAFTA and Agriculture, An Early Assessment, Working paper no. 807. Gianninni Foundation, University of California, Berkeley, CA. 26 Krueger, A.O. 1999. Trade Creation and Trade Divers ion Under NAFTA, Working Paper 7429, National Bureau of Economic Research, Cambridge, MA. 27 Hinojosa-Ojeda, R., D. Runsten, F. Depaolis and N. Kamel. 2000. The U.S. Employment Impacts of North American Integration After NAFTA: A Partial Equilibrium Approach, unpublished manuscript, North American Integration and Development Center, Sc hool of Public Policy and Social Research, UCLA Los Angeles, CA.

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26 commodities from Mexico occurred at a slower rate than growth in imports of commodities from Mexico not affected by NAFTA liber alization, therefore s uggesting that the increased growth rate of U.S. imports from Mexico, post-NAFTA, may be at tributed to other events of the time such as the peso crisis and ongoing bi-n ational industrial integration. The authors used a partial e quilibrium model to present re sults regarding potential job impacts. Total estimated potential job impact in the U.S. due to imports from Mexico, from 1990 to 1997, would be 299,000 and about 458,000 due to impor ts from Canada during that same time. Breaking this down to an annual figure implies th at Mexican and Canadian trade with the U.S. impacts an average of 37,000 and 57,000 U.S. jobs respectively, a relativel y insignificant amount when compared to the average of 2.4M jobs annually created in the U.S during that period. Effects of North American Free Trade Agr eement on Agriculture and the Rural Economy 28 The U.S. Department of Agriculture ( 2002) used economic models and expert assessments by commodity trade specialists to examine NAFTAs trade impact on 38 commodities or commodity groupings. Similar to other Krueger (1999), the study found that NAFTA had little to no effect on th e majority of the commodities. However, for a select group of commodities NAFTA had significant and positive effect on trade with the U.S. Table 4 is a summary of the U.S. Department of Agriculture (USDA) study, which reports the estimated change in trade volume between the U.S. and Mexico due solely to NAFTA by selected commodity from 1994 2000. Additionall y, Table 4 reports the pre-NAFTA tariff that was eliminated when NAFTA was implemented. With respect to U.S. exports to Mexico, six individual commodities increased by more than 15 % because of NAFTA. With respect to U.S. imports from Mexico, only 3 commodities incr eased by more than 15% because of NAFTA. Lastly, the study examined NAFTAs effect of FDI and U.S. employment and found small positive effects in FDI and employment directly related to NAFTA Table 4 NAFTA Effects on U.S. and Mexic o Trade Volume by Selected Commodities 1994 2000 Estimated Change in Trade Volume Due Solely Selected Commodities Pre NAFTA Tariff U.S. Exports to Mexico to NAFTA Rice 10% on rough and broken rice, and 20% on milled rice. >15% Dairy Products Import licenses requirements, and zero to 20% on dairy products. >15% Cotton 10% tariff to be phased out over a 9 year-period. >15% Processed Potatoes 15% on frozen potatoes and 20% on dried. >15% Fresh Apples 20% tariff on fresh apples. >15% Fresh Pairs 20% tariff on fresh pairs. >15% Corn Import license requirement removed an d elimination of price support. 6% to 15% Oil Seeds 15% phased out over a 9 year-period 6% to 15% 28 U.S. Department of Agriculture, 2002 Effects of North American Free Trad e Agreement on Agriculture and the Rural Economy. WRS-02-01. Washington, DC.

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27 Table 4 Continued Beef and Veal 20% on fresh beef/veal and 25% on frozen beef/veal. 6% to 15% Sorghum 15% seasonal tariff immediately removed. (>-15%) Wheat Products 0.77 cents per kilogram on non-durham phased out in 4 years, and durham phased out over 10 years. >15% Cattle and Calves 2.2 cents per kilogram on non-dairy and non-purebred cattle. >15% Peanuts Section 22 quotas were replaced with Tariff Rate Quotas starting at 3,377 metric tons in 1994, and increase by 3% each year until phased out in 2008. >15% Sugar 0.66 cents per pound. >15% Fresh Tomatoes 3.3 or 4.6 per kilogram. 6% to 15% Processed Tomatoes 7.5% to 14.7% per kilogram. 6% to 15% Cantaloupe 20% to 35% tariff rate depending on the season. 6% to 15% Source: USDA Has NAFTA Changed North American Trade? 29 Using a gravity model, Gould (1998) uses quarterly data from 1980 to 1996 from NAFTA countries to estimate the effects of NAFTA on bilate ral trade flows. The st udy finds a statistically significant relationship between Mexi co and the U.S. with respect to U.S. exports. Hence, U.S. exports to Mexico have grown faster than would have been expected had NAFTA not been implemented. With NAFTA, U.S. export growth is 16.3% hi gher per year on average, which is the equivalent to an increase in exports worth $21.3B Additionally, Gould finds that U.S. imports from Mexico increased by 16.2% per year on av erage or about $20.5B in additional imports. However, the statistical significance is only ma rginal, which implies trade without NAFTA could have resulted in the same increas e in imports. Gould finds no rela tionship between Canada and the U.S. with respect to imports and exports, but th is is not surprising sinc e the U.S. and Canada negotiated a free trade agreement five years befo re the implementation of NAFTA. Lastly, Gould concludes that NAFTA was trade creating, in that trad e with non-NAFTA countries increased after the implementation of NAFTA. This contra sts with the findings of Krueger (1999). The Impact of NAFTA on the U.S. Econom y and Industries: A Three-Year Review 30 The International Trade Commission (ITC) used a regression model to study the effects of NAFTA on U.S. and Mexico. The ITC estimates th at NAFTA increased U.S. exports to Mexico by 1.3% in 1994, 3.9% in 1995, and by 2.9% in 1996. Additionally, the ITC study reports that U.S. imports from Mexico increased by 1.0%, 4.9%, and 6.4% for 1994, 1995, and 1996. Thus, trade between the U.S. and Mexico increased due to NAFTA. 29 Gould, D. 1998. Has NAFTA Changed North American Trade? Economic Review Federal Reserve Bank of Dallas, First Quarter, pp. 12-23. 30 International Trade Commission Report on NAFTA, 1997. The Impact of the NAFTA on the U.S. Economy and Industries: A Three-Year Review, Publication No. 3045

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28 The Effects of NAFTA U.S.-Mexican Trade and GDP 31 The Congressional Budget Offices (CBO) repor t estimates the effects of NAFTA on U.S Gross Domestic Product (GDP), U. S. Exports to Mexico, and U.S. Imports from Mexico for the time period of 1994 2001. The CBO, similar to Gould (1998) and the ITC (1997), used multiple regression analysis to isolate the effects of trad e due solely to NAFTA. The CBO used quarterly data from 1969 through 2001 to model U.S.-Mexican trade. The CBO import model excluded crude oil imports due to signifi cant variations over time with respect to other imports. First, models were estimated to predict wh at trade and U.S. GDP would have been if NAFTA had not been implemented in 1994. The without-NAFTA model assumed that tariffs would remain at 1993 levels through 2001. Next, NAFTA models were estimated, which added a dummy variable to the regression to capture th e effects of the tariff provisions of NAFTA. The effects were calculated as the difference, averag ed year by year, between the NAFTA model and the without-NAFTA model. The CBO finds that the effect of NAFTA on U.S. exports to Mexico was larger than the effect NAFTA had on U.S. imports from Mexico. According to the CBO, NAFTA increased U.S. exports to Mexico by 2.2% in 1994, but this figure rose to 11.3% by 2001. With respect to U.S. imports from Mexico, the CBO finds that NAF TA increased imports by 1.9% in 1994 and by 7.7% in 2001. These results are in line with the ITC st udy, and in the same direction, but generally more subdued than the findings of Gould. According to the CBO, the effects of NAFTA on U.S. exports to Mexico, Mexico exports to the U.S., and U.S. GDP are increasing with time This gradual increase in gains from NAFTA is expected given that all tari ffs are not scheduled to be phase d out until 2008. For example, the average U.S. tariff rate on total goods imported fr om Mexico fell from 2.0% in 1993 to about 0.2% in 2001 while the average Mexican tariff rate fell from 10.3% in 1993 to about 0.2% in 2001. Summary The North American Free Trade Agreemen t (NAFTA) was implemented on January 1, 1994 between the United States, Canada, and Mexic o. NAFTA called for th e elimination of all trade restrictions over a 10 to 15year period. Since the implementation of NAFTA, a handful of empirical studies have attempted to measure the effects of NAFTA on U.S. imports, exports, employment, and GDP. All the studies point out that the main effects of NAFTA would come from the elimination of trade barriers between the Mexi co and the U.S., and Mexico and Canada. Prior to NAFTA, the U.S. and Canada had already ma de significant progress in eliminating trade barriers with the Canada-United States Free Trade Agreement.32 Table 5, below, summarizes the effects of NAF TA on U.S. and Mexico trade and U.S. GDP based on studies by the CBO, ITC, and Goul d. The percentages are reported as year over year increases due solely to NAFTA. 31 Congressional Budget Office, 2003. The Effect s of NAFTA on U.S.-Mex ican Trade and GDP. 32 The Canada-United States Free Trad e Agreement was enacted in 1988.

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29 Table 5 Summary of Effects of NAFTA on U.S. and Mexico Trade Year Over Year Year Over Year Percent Increase in Percent Increase in Percentage Increase U.S. Exports to Mexico U.S. Imports from Mexicoin U.S. GDP (CBO) Study CBO ITC Gould CBO ITC Gould Exports Imports 1994 2.2% 1.3% 16.3% 1.9% 1.0% 16.2% 0.02% 0.01% 1995 4.7% 3.9% 16.3% 4.9% 5.7% 16.2% 0.03% 0.04% 1996 7.2% 2.9% 16.3% 6.1% 6.4% 16.2% 0.05% 0.06% 1997 8.6% ----6.8% ----0.07% 0.07% 1998 9.5% ----7.2% ----0.09% 0.08% 1999 10.8% ----7.4% ----0.10% 0.09% 2000 10.3% ----7.2% ----0.12% 0.11% 2001 11.3% ----7.7% ----0.12% 0.11% The studies reviewed in Table 5 vary in their estimates of the effect of NAFTA on U.S. exports to Mexico and U.S. imports from Mexico, but the overall consensus of the three studies is that the effects of NAFTA have been positive with respect to U.S. and Mexico trade and with respect to U.S. GDP. All three U.S.-Mexico studies cite that the phase out period of tariffs is crucial to understanding the potential effects of NAFTA. The literature indicates that the low pre-NAFTA U.S. tariff rates on imported goods from Mexico are the factor that explai ns the relatively low increase in Mexican imports to the U.S. Conve rsely, the elimination or lowering of high preNAFTA tariffs imposed on U.S. goods by Mexico c ontributed to the increase in U.S. exports to Mexico. In conclusion, NAFTA has had a positive effect on U.S. and Mexico trade, but not the heavy negative or positive effects critics and pr oponents predicted it w ould have prior to its implementation. Year

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30 Section 4: Potential Impacts: Economic Modeling In this section, we use two computer mode ls, IMPLAN and REMI, to estimate the potential effects of an FTAA on the state of Florida. We report economic effects in terms of employment, output and gross state product. Employment refers to jobs (not workers as a worker may hold more than one job), output is defined as sales adjusted for inventory, and gross state product is output minus inputs and can also be thought of as compensation and profit. These three variables are interrelated descriptors of the same econo my, much as mass, volume and density each can describe a solid. Appendices C and D respectively, contain descri ptions of the IMPLAN and REMI models. Our estimation approach is two-fold. The REMI model, while highly complex and considered the pre-eminent economic modeling so ftware, does not include import and export cost variables for the primary agricultu re sub-sectors. So we first use the IMPLAN model to estimate the direct net employment effect of an FTAA on NAICS subsectors 111 (Crop Production) and 112 (Animal Production). We then enter the estimated direct net employment effect of an FTAA concomitantly with a reduction of export and import costs thus simulating reduction of tariffs for the manufacturing sectors of the economy into the REMI model. Additionally, we also provide estimates of the economic effects of an FTAA sh ould the tariffs be reduced by 50%, i.e. partial implementation. Direct Employment Effect of an FTAA on Agriculture Sector Here we utilize the IMPLAN model to estimate the potential direct em ployment effect of an FTAA on NAICS sub-sector s 111 (Crop Production) and 1 12 (Animal Production). To estimate the direct employment effects of an FTAA, we introduce to the model the estimated change in output an FTAA would have on the Crop Production and Animal Production industries. These estimates, taken from a USDA report, are shown in Table 6 .33 Table 6 Effects of the FTAA on U.S. Agricultural Production, by Commodity Commodity Real Change in Output (%) Rice 3.2 Wheat 0.0 Other Grains -0.5 Horticulture 0.0 Oilseeds 0.4 Other Crops -0.6 Livestock -0.4 Raw Milk 0.1 Meat -0.3 Dairy Products 0.1 Source: Economic Res earch Service, USDA 33 Burfisher (2004)

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31 We assume that the effects of an FTAA on Fl orida would mirror these national effects, and fit these commodities into their corresponding IMPLAN sectors, weighting by production when two or more commodities fit into a single IMPLAN sector. Table 7 displays the calculated percent changes in output for the IMPLAN sectors Table 7 Percent Change in Output by IMPLAN Sector IMPLAN Sector Commodity(ies) NAICS Sub-Sector % Change in Output 1 Oilseeds 111 -.4000% 2 Rice, Other Grains 111 -.0714% 10 Other Crops 111 -.6000% 11 Livestock, Raw Milk, Dairy Products 112 -.0749% 12 Meat 112 -.3000% 13 Meat, Livestock 112 -.3500% We then enter the percent changes in output into the IMPLAN model. Table 8 reports the estimated direct net employment effect of an FTAA on Floridas crop and animal production subsector. Table 8 Estimated Direct Net Employment Effects of an FTAA of Florida Agriculture Sub-Sector Jobs Crop Production (NAICS Sub-Sector 111) -0.3 Animal Production (NAICS Sub-Sector 112) -29.6 Total 111 and 112 -29.9 The Department of Agricultures report doe s not nationally predict the FTAAs effect on NAICS industries 11131 (Orange Groves) and 111 32 (Citrus except Orange Groves) or 11193 (Sugarcane Farming). Hor ticulture the category that includes citrus is not predicted to be affected in the aggregate by the FTAA. However, the effects on citrus juices and processed sugar are included within the results for the manufact uring sector on the following pages, where we model the effects of regional tariff elimination fo r processed foods. Additionally, for sensitivity analysis we present in Appendix B the estimate d economic effects of a 0.6% output reduction the maximum reduction shown in Table 6 on Florid as citrus and sugar cane industries. The economic effects of this alternate scenario do not differ greatly from our primary scenario. Economic Impact of an FTAA Tariff Changes Here we utilize the REMI model to estimat e the total economic effects of an FTAA on Floridas economy. We introduce to the model the direct employment effects generated by the IMPLAN model and concomitantly adjust the For eign Export Costs (Share) and Foreign Import Costs (Share) on other industries to simu late the economic effects of an FTAA.

33 To reduce import costs in the model, we use estimates published by the National Association of Manufacturers (NAM ). The NAM, in a 2005 publicati on, states that the average applied industrial tariff imposed by the U.S. on goods from Latin American countries is 3.7%.34 We scaled this figure by the share of U.S. impor ts from FTAA countries (less U.S. imports from NAFTA countries) relative to wo rld imports to the U.S. Inhe rent to this methodology is the assumption that Floridas appetite for imports mirror s the nations. Table 10 reports, for year 2004, the share by NAICS sub-sector of Floridas imports from the 31 non-NAFTA FTAA nations, the average applie d tariff, and in the right-most column, the product of the share and the tariff. This is the amount by which we will reduce Foreign Import Costs (Share) in the REMI model. Table 10 Foreign Import Cost Reduction Calculation REMI Sectors Item Share of US ExportsTariff Tariff x Share 1 11 Agriculture, Forestry, Fishing, and Hunting 26.99%3.70% 1.00% 3, 4 21 Mining 18.51%3.70% 0.69% 19, 20, 21, 22, 23, 24 31 Manufacturing; Part 1 11.48%3.70% 0.42% 8, 9, 25, 26 27, 28, 29 32 Manufacturing; Part 2 7.17%3.70% 0.27% 10, 11, 12, 13 14, 15, 16, 17 18 33 Manufacturing; Part 3 2.53%3.70% 0.09% 40 51 Information 0.22%3.70% 0.01% 30 910 Waste & Scrap 10.23%see below 30 920 Used Merchandise 1.28%see below 30 990 Special Classification Provisions 3.21%see below Note: Items 910, 920, and 990 were weighted by trade and assigned to the Wholesale Trade sector. 30 Wholesale Trade 3.58%3.70% 0.13% Comparison of the export and import cost re ductions shows that the U.S. faces higher tariffs on its exported goods than it imposes on FTAA goods entering the country. This is consistent with the practice of protective tariffs. Smaller economies generally will have larger tariffs than large economies to protect their industri es from foreign competition. We also note here that we do not adjust import or exports costs for se rvices or investment, as no tariffs exist for these types of trade, per se. 34 To the Point: Talking Points for Manufacturers. (2005). Retrieved April 1, 2005, from http://nam.org/s_nam/doc1.asp?CID=14&DID=233610

37 Floridas economy. Panel C of Appendix E presents detailed GSP changes for 68 industry subsectors for all years 2006-2015. Economic Impact of an FTAA Summary Using estimates of output change from the U.S. Department of Agriculture, we estimate a very minor direct loss of jobs 30 in the animal and crop production s ub-sectors of Floridas economy. Of these, the bulk of job loss will be borne by animal production workers. The USDA estimates predict no change in output for citrus growers. Table 14 presents a summary of estimated economic effects due to the enactment of an FTAA. We present the absolute differences, as we ll as the percentage differences, from Floridas forecasted economic baseline. Table 14 Summary of Economic Effects Reduction of Export and Import Tariffs Full Implementation 2006 2015 Employment 24,973.72 0.26% 33,483.22 0.31% Output (Bil. 96$) $ 4.501 0.52% $ 8.319 0.69% GSP (Bil. 96$) $ 2.223 0.39% $ 4.820 0.59% By modeling the elimination of tariffs on manuf actured goods, we predict that enactment of an FTAA would add in the firs t year almost 25,000 new jobs to Floridas economy, $4.5B (1996$) in output (sales), and $2.2B (also 1996$) to GSP. These effects represent 0.26%, 0.52%, and 0.39% increases, respectively, over the baseline economic forecast. By the tenth year of enactment, these percentages increase, indicating that the economic effects of free trade gain steam over time. For the purpose of sensitivity analysis, Table P14 reports the percentage difference between full implementation of an FTAA and pa rtial implementation. We define partial implementation as a 50% reduction of examin ed tariffs between the U.S. and an FTAA. Table P14 Difference in Estimates Percentage Difference Between Full and Partial Implementation 2006 2015 Employment 51.38% 51.13% Output (Bil. 96$) 51.53% 51.46% GSP (Bil. 96$) 51.42% 51.45% The data indicates that full reduction of tari ffs between the U.S. and its prospective FTAA partners provides higher margin al economic benefits than part ial reduction. Detailed tables describing the effect of partial implem entation of an FTAA are contained in Panels A through C of Appendix F

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38 Section 5: Conclusions Given its proximity, it is logical that the Cent ral and South American nations are Floridas largest trading partners for goods. Common time zones between North and South America also give services trade a competitive advantage between the two regions, vis--vis the rest of the world. Based on the U.S. experience post-NAFTA the enactment of an FTAA would further increase trade between the U.S. and its hemispheric neighbors. The FTAA, which if enacted would become the worlds largest free trade area in the world, would have a positive effect on Floridas em ployment, output, and GSP. Although tens of thousands of new jobs and billions of dollars of output and product are la rge effects, in relative terms these indicators would increase by no more th an 7/10 of one percent in the event of a full enactment of the FTAA. Our estimates are in th e same direction, but generally more subdued than, other reports. We believe our inclus ion of import effects accounts for this. There are opportunities for further research. New research with more definitive countryspecific and product-specific tariffs can increase the precision of economic impact estimates. Precision may also be enhanced by generating USDA-like estimates for changes in levels of agricultural especially citrus and sugar outputs due to FTAA for the state of Florida. For this research, we lacked data for im ports for consumption in Florida from FTAA countries, although aggregate data on nationwide impor ts is available. Generating definitive data on imports for consumption in Florida would obviat e our assumption that Fl oridas appetite for imports mirrors the nations. Additionally, quantifying the di rect effects of an FTAA on se rvices trade tourism is a multi-billion dollar industry in Florida is need ed for a more complete understanding of the economic effects of this proposed trade agreement.

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39 Appendix A Production and Trade Data Table of Contents Gross Domestic Product for FTAA Nations, 1981-2000.. 40 Agricultural Value-Added as a % of National Economy.. 43 Industrial Value-Added as a % of National Economy.. 44 Value-Added from Services as a % of National Economy... 45 U.S. Agricultural Exports to Individual Countries, 1989-2004 46 U.S. Agricultural Imports from Individual Countries, 1989-2004... 48 U.S. Agricultural Net Exports to Individual Countries, 1989-2004. 50 U.S. Exports of Manufactures to FTAA Nations, 1989-2004.. 52 U.S. Imports of Manufactures from FTAA Nations, 1989-2004. 54 U.S. Net Exports of Manufact ures to FTAA Nations, 1989-2004... 56 U.S. Exports of Private Services to the Western Hemisphere, 1986-2003.. 58 U.S. Imports of Private Services fr om the Western Hemisphere, 19862003. 59 U.S. Net Exports of Private Servi ces to the Western Hemisphere, 1986-2003... 60 USDIA in FTAA Nations, 1982-2002.. 61 FDIUS from FTAA Nations, 1982-2002.. 64 USDIA Net of FDIUS fo r FTAA Nations, 1982-2002. 67

70 Appendix B Citrus and Sugarcane Production in Florida FTAA Citrus Production, 1986 2002 From 1986 2002 total citrus production among the FTAA nations has increased by 35.4%, increasing from 31.8M metric tons in 1986 to 49.2M metric tons in 2002. Over this time period FTAA citrus production has accounted for mo re than 85% of the worlds total citrus production. Brazil, the United Stat es, and Mexico are the three la rgest citrus producing nations among FTAA nations and in the world. Brazil is the largest citrus pr oducing nation while the United States is the second largest producing nation. Chart C1 below displays the distribution of FTAA citrus production from 1986 2002, and the share of production represented by Brazil, the U.S. (excluding Florida), Mexico, the state of Florida, and the remaining FTAA nations From 1986 2002 the share of total FTAA production has decreased slightly for the U.S. and Brazil, while Mexico, Florida, and the remaining FTAA nations slightly increased thei r share of FTAA citrus production. Mexico has experienced the largest gains in share of total FTAA citrus producti on, which may be related to the reduction in trade barriers between the U.S. and Mexico as a result of NAFTA. In 2002, Florida accounted for 19.1% of the total FTAA citrus production Chart C1 Distribution of FTAA Citrus Production, 1986 20020% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 19861987198819891990199119921993199419951996199719981999200020012002Percent of FTAA Citrus Production Florida Rest of U.S. Brazil Mexico Remaining FTAASource: Food and Agricultural Division of the United Na tions, and the Florida Agricultural Statistics Service. Florida Citrus Production, 1984 2004 Chart C2 displays total Florida citrus producti on, orange production, and grapefruit production from 1984 2004. Total Florida citrus production in cludes oranges, grapefruit, tangerines, temples, tangelos, K-Early citrus fruit, limes, and lemons. However, we only separately report statistics for oranges and grapefruit because thes e two fruits account for more than 96% of total citrus production in Florida.

74 Table S1 Continued 1999 16,100 $27 $437,920 2000 17,041 $29 $487,373 2001 16,338 $32 $517,915 2002 17,653 $32 $559,600 Source: Florida Agricultural Statistics Service Florida production of sugarcane follows a st eadily increasing trend, while the value of production varies with the price per box of sugarcane. From 1986 2002 the price per box of sugarcane fluctuated between $27 and $32 per bo x, while the value of produced ranged from $389M $559M. Net Direct Employment Effects Alternate Scenario In Section 4 of this report, we used predictions of output change from a USDA report to estimate the effect of an FTAA on Floridas agri culture crop and animal production sub-sectors. In their study, the USDA reported no predicted cha nge in output for horticulture the category to which citrus and sugarcane belong crops. We recognize that the USDA reports national net figures, so for the purpose of sensitivity anal ysis, we use the IMPLAN software to model an alternate scenario in which we reduce citrus and sugarcane output in Florida by 0.6%, the greatest decrease predicted by the USDA for any crop gro up. We simultaneously retain the other crop production output changes previously modeled. Table B shows the estimated net direct employment effect based on the alternate scenario. Table B Crop Production Se nsitivity Analysis Alternate Scenario Industry Job Loss% Loss Grain Farming 0.10.06% Fruit Farming* 84.00.35% Sugarcane and Sugar Beet Farming 107.60.60% All Other Crop Farming 5.10.02% Total 196.80.27% Fruit Farming includes citrus and other fruits, we scaled the 0.6% decrease to model only a reduction in citrus output Our prior modeling yielded a direct loss of 0.3 Crop Production (NAICS 111) jobs. Under the alternate scenario, we estimate enactment of an FTAA would result in the loss of 196.8 jobs to that sub-sector, or 0.27% of the total. More than half of this estimated job loss is predicted to come from the Sugarcane and Sugar Beet industry. We ran the new direct employment loss th rough the REMI model, and found no significant differences from the economic effects reported in Section 4.

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75 Appendix C Description of Input-Output Models The Center for Economic Development Re search (CEDR), College of Business Administration, University of Sou th Florida (USF), uses the IMPLAN ProfessionalTM Social Accounting and Impact Analysis Software (an input -output model) for economic impact analyses. Data (2002) for each county in the state of Fl orida are available. County-wide data may be aggregated to focus on a region, such as th e 7-county region Hernando, Hillsborough, Manatee, Pasco, Pinellas, Polk and Sarasota of specia l importance to the USF community. Dr. Dennis Colie generated the following description of the model over several years based on documentation from the software developers. Economic impact analysis is based on conditi onal, predictive mode ls of the form: If ...then... An input-output model is one type of m odel used in impact analysis. Other generally accepted models are the economic base model and the income-expenditure model. Compared with the input-output model, both the economic base and income-expenditure models are limited in application to small economic regions in wh ich the interdependencies (sales/purchase relationships) between producing sectors are insignificant. Interindustry relationships were first de scribed in 1758 by the Frenchman Francois Quesnay, founder of the physiocratic or natural order philosophy of economic thought. The physiocrats depicted the flow of goods and money in a nation, and thus made the first attempt to describe the circular flow of wealth on a macr oeconmic basis. Wassily Leontief was born in Russia in 1906 and first studied economic geography at the Univers ity of St. Petersburg before moving to Berlin and China. He came to the Un ited States in 1931 and, after a brief 3-month stint at the National Bureau of Economic Research in New York, he was hired by Harvard University. At Harvard, Professor Leontief undertook a research project that encompassed a 42-industry inputoutput table showing how changes in one sector of the economy lead to changes in other sectors. From this research, he developed the concept of multipliers from input-output tables, and was subsequently awarded the Nobel Prize in economi cs in 1973 for his development of input-output (I-O) economics. The historical transactions data in the I-O model represent the sale s and purchases between sectors that occurred over an estimation period. These data describe each sectors purchases and sales linkages with the rest of the economy. For each productive se ctor the transaction data take into account all sales revenue and costs, with the difference between revenue and costs being profit, which is a part of value added. (Tot al value added to a product at each stage of its production is the sum of wages and salaries, rents, profits, interest, and divi dends.) The historical transaction or descriptive da ta are used to create the descriptive model of information about local economic interactions called regional economic accounts. These accounts, or transaction tables, describe a local economy in terms of the flow of dollars from purchasers to producers within the defined region. For example, an increase in government purch ases (first round) of output from the manufacturing sector of a region may require the manufacturing indus try, in order to expand output, to purchase (second round) factor inputs from other sector s of the regional economy. In turn, these other sectors may have to purchase (third round) inputs to deliver the supporting

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76 production of factors to the manufacturing sector The rounds of spending will continue with each round becoming increasingly weaker in its impact because of leakages from the region attributable to imports savings, and taxes. The first round is called the dire ct effects of the change in final demand (consumption) in a sector(s) of the economy. The second and subseq uent rounds are collectivel y referred to as the indirect effects of interindustry purchases (reduction in purchases) in response to direct effects. The open I-O model just described does not take into account changes in spending in the region, in response to the direct effects, for household consumption. Changes in spending from households as income or population increases (decr eases) due to changes in the level of production are called induced effects. Induced effects are incorporated into the I-O descriptive model by forming a closed model. That is, transactions of the household sector are made endogenous to the model by treating households as a producing sector. The household sector sells its labor to the other producing sectors and purchases factor inputs, i.e. consumption expenditures, in order to maintain its labor. There are two steps in impact analysis using th e I-O model. First, th e descriptive model is created; then, the predictive mode l is derived from the descriptive model. The descriptive model contains information about interi ndustry transactions called the regional economic accounts The information describes the flow of dollars from purchasers to producers within the region. In addition to the regional economic account s, the descriptive I-O model includes the social accounts Social accounting data include, for example, taxes paid by businesses and households to government, and transfer payments from governme nt to businesses and households. Trade flows also are a part of the social accounts. Trade flows describe the movement of goods a nd services between the region and the rest of the world, that is imports and expo rts. The analyst must choose between regional purchase coefficients (RPCs) or supply/demand pooli ng. RPCs are econometrically derived to predict local purchases based upon a regions ch aracteristics. In contrast, supply/demand pooling presumes everything than can be purchased locally, will be. Hence, it will lead to larger multipliers than RPCs, because the leakages for imports are less. (The analyst also decides if local purchase coefficients LPCs are to be a pplied to an event during impact anal ysis. If the LPCs were to be applied, the models RPCs are used to determine how mu ch of the first-round expenditure is used to purchase local products and how much is for imported items. Otherwise, the RPCs are applied to second and subsequent rounds of spending only.) The regional economic accounts and soci al accounts are used to build multipliers The multipliers are the predictive I-O model. A set of multipliers are expected changes in output for each industry in the model given a one dollar change in final demand for any particular industry or commodity. A multiplier measures the effects of a change in final demand(s) in a region. The change in economic activity is called the impact The impact is essentially the expected or predicted

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77 consequence of a change in final demand(s) within the region due to a single event or a group of events. A group of related events may be referred to as a project. A Type I multiplier measures the direct and indirect effects of a change in economic activity. It only capture s interindustry effects with in the region. In addition to the direct and indirect effects, a Type II mu ltiplier captures the induced effects of changes in household income and expenditures. A Type III multiplier also captu res direct, indirect, and induced effects. However, the Type III multiplier estimates the induced effects based upon changes in employment. It assumes the region is at full employment, then each job added or subtracted by the impact is associated with the regions average expenditu res per person. A Type II multiplier is most commonly used in impact analyses. Personal consumption expenditures (PCE) are spending by households and are strongly related to total personal income Total personal income is in come from all sources, including employment income and transfer payments that are based on place of residence. Because of commuting patterns, PCE in a region may not be st rongly related to employment income in that location. Hence, the income based induced effect s of the Type II multiplier are normally adjusted so that a regional average amount of transfer payments is associated with a change in employment income. Such multiplier is called a Social A ccounting Matrices (SAM) Income multiplier. However, suppose that an increase (decrease) in employment income is not anticipated to be associated with a corresponding chan ge in regional transfer payments. For instance, it may be believed that an increase in final demand will only generate low paying jobs. Then, it is likely that the under-employed will be hired and transfer payments will not increase in the region. Accordingly, a Specific Disposable Income may be applied to the Type II multipliers. That is, the change in household consumption expenditures is estimated by disposable income, which is defined as a specified (by the analyst) percentage of employment income. A change in final demand may be applied to an industry or to a co mmodity. Industries are businesses producing goods and services; commoditi es are the goods and services being produced. An industry can make more than one commodity. An industry usually is named for the primary, by value, commodity it produces. Commodities produced by an industry, other than its primary commodity, are called secondary commodities or byproducts. An industry-applied change in final demand has a direct effect on th e selected industry onl y. A commodity-applied change in final demand directly affects all industries that pr oduce the commodity, whether as a primary or secondary commodity. The analyst chooses between an industry or commodity applied change in final demand. The choice is appropriately base d on the circumstance for the change in final demand. The choice will affect the predicted impact. As an alternative to estimating the economic impact of a change in final demand (at the factory door), the analyst may estim ate the impact of a change in sales and employee payroll for a particular institution, e.g. state/local government education, or business sector. Then, a typical expenditure pattern for th e institution or industry is generated to assess the economic impact of the change in sales and payroll. (If the event under study is believed to have an atypical expenditure pattern, this alternative appro ach is inappropriate. Instead the analyst should specify the expenditure pattern of the institution or industry in detail.) Using this alternative approach, the direct effect on final demand, i.e. output, in the regi on will be less than the change in sales. This

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78 happens because the model includes the institutio ns or industrys produ ction function and final demand is an estimate of the value, in producer pri ces, of the factor inputs needed to generate the specified change in level of sales. The differe nce between the estimated change in final demand and the change in sales is tota l value added. Also, with this approach, the induced effects are interpreted as resulting from a change in household spending by the suppliers of the institutions or industrys factor inputs (fi rst round) as well as subsequent ro unds of interindustry sales/purchases. Margins are used to convert purchaser prices to producer prices. Margins depend on the consumer. For example, households pay the full retail margins, but govern ment may pay little or no retail margins because it has more buying power than individual households. Margins split a purchaser price into appropriate producer valu es, each value impacting a specific industry. For example, the purchaser price of a tire at an au tomotive retailer includes the producer price at the factory door plus transportation costs, the whol esalers markup, and the retailers markup. Unless edited by the analyst, margins used in impact analysis are national averages. A deflator may be used to conve rt expenditures to the base year (estimation period) used to calculate predictive multipliers and to inflate the reports of impact analysis to the current year. Deflators are associated with commodities, and are also used to adjust margin values. A predicted regional impact may be gauged in terms of output (a change in production measured in dollars), of employment (a change in employment measured by number of jobs), or of personal income (a change in income from all sources, including em ployment and transfer payments, for persons residing in the region). I-O Model Assumptions The following are the fundamental assumptions of the I-O model. First, it is assumed that the proportions in which each sector purchases its inputs from all other sectors are invariant over the period of analysis. The implications of this assumption are unchanged technology, constant relative prices, no shift in the mix production activi ties within sectors, and no new significant firm has moved into or out of the region. Second, the I-O model assumes linear production f unctions, that is a sectors inputs remain in proportion to its output. This implies that no industr y enjoys economies of scale. Third, each sector of the regional economy is assumed to be homogeneous. An increase (decrease) in a sectors final demand will always have the same impact on the economy. And fourth, in the closed I-O model, in assumed that the household sector s marginal propensity to consume equals its average propensity to consume.

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79 Appendix D Description of REMI Model The Center for Economic Development Re search (CEDR), College of Business Administration, University of Sou th Florida (USF), uses the REMI Policy InsightTM model to estimate economic and demographic effe cts that policy initiatives or external events may cause on a regional economy. Data the last available historical year is 2001 for each of USFs seven county economic development region, Hernando, Hillsborough, Manatee, Pasco, Pinellas, Polk and Sarasota; as well as the counties of Brevar d, Lake, Orange, Osceola, Seminole and Volusia; and a consolidation of the remaining 54 Florida c ounties are available. The REMI software is managed by CEDR and available to the USF comm unity for research and teaching purposes. Dr. Dennis Colie generated the following description of the model over several years based on documentation from the software developers. Founded in 1980, Regional Economic Models, Inc. (REMI) constructs m odels that reveal the economic and demographic effects that policy initiatives or external events may cause on a local economy. REMITM Policy Insight model users include na tional, regional, state, and city governments, as well as universit ies, nonprofit organizations, public utilities and private consulting firms. REMITM users in Florida include the State of Florida (Legislature, Governors Office, Agency for Workforce Innovation), Tampa Bay Re gional Planning Council, the University of South Florida, Florida State University, City of Jacksonville, Floridas Space Coast Economic Development Commission, and the North east Florida Regional Planning Council. REMITM is a dynamic model that predicts how changes in an economy will occur on a year-by-year basis. The model is sensitive to a wide range of policy and project alternatives as well as interactions between regional economies and the national economy. The model uses data from the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Department of Energy, the Census Bureau and other public sources. The models dynamic property means that it fo recasts not only what will happen but also when it will happen. This results in long-term predictions that have general equilibrium properties. This means that the long-term properties of ge neral equilibrium models are preserved without sacrificing the accuracy of event timing predictions and without simp ly taking elasticity estimates from secondary sources. REMITM is a structural model, meaning that it clearly includes cause and effect relationships. The model shares two key underl ying assumptions with mainstream economic theory: households maximize utility and producers maximize profits. Because these assumptions make sense to most people, the model can be understood by intelligent lay people as well as trained economists. In the model, businesses produce goods to se ll to other firms, consumers, investors, governments and purchasers outside of the region. Th e output is produced usi ng labor, capital, fuel and intermediate inputs. The demand for labor, cap ital and fuel per unit of output depends on their relative costs, because an increase in the price of any one of these inputs leads to substitution away from that input to other inputs. The supply of la bor in the model depends on the number of people in the population and the proportion of those people who participate in the labor force. Economic

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80 migration affects the population size People will move into an area if the real after-tax wage rates or the likelihood of being empl oyed increases in a region. Supply and demand for labor in the model determ ines the wage rates. These wage rates, along with other prices and productivity, determine the cost of doing business for every industry in the model. An increase in the cost of doing busine ss causes either an increas e in price or a cut in profits depending on the market for the product. In either case, an increase in cost would decrease the share of the local and US market supplied by lo cal firms. This market share combined with the demand described above determines the amount of local output. There are also many other feedback loops in the model such as the feedba ck from changes in wages and employment to income and consumption, the feedback of economic expansion to investment, and the feedback of population to government spending. The model brings together the fundamental ec onomic elements mentioned in the previous two paragraphs to determine a baseline forecast for each year The model includes all the interindustry relationships that are in an in put-output model, like IMPLAN ProfessionalTM, and goes beyond the input-output model by including added relationships with population, labor supply, wages, prices, profits, and market shares. A feature, which distinguishes the REMITM model from other economic simulation models, is the way REMITM handles the labor market. In the basic REMITM model, the general equilibrium demand for labor slopes downward and the genera l equilibrium supply of labor slopes upward. The wage responds to derived labor demand and ther e is an inverse relatio nship between the wage and market share. Thus, as the demand for labor ri ses, the wage rises and ma rket share falls. Also, migration responds directly (positively) to a ch ange in the wage, ther eby increasing the labor supply. In contrast with REMITM, a basic input-output model s uppresses the labor intensity response to wage rates, market shares respons es to regional competitiveness, and migration response to real after-tax wage rates and relative empl oyment rates. The resu lt is a horizontal labor supply curve and a vertical labor demand curve. Employment is a fixe d proportion of output. Thus, a basic input-output model is linear with respect to a change in output or employment. Labor is immobile, i.e. migrati on is not an alternative to unemp loyment. Following from labor immobility, an implied assumption is that ther e are unemployed workers in the region if the number of jobs is to increase. Labor immob ility is the assumption of Type I (without household sector) and Type II (with househol d sector) input-output models.